How can pay-as-you-go work comp policies fluctuate so much at audit time?

We had a question similar to this asked by an insurance agent audience member during my recent visit to North Carolina. Her question was more about how monthly reports could be so far off and what can we do to stop that from happening. Not exactly the same but similar. So let’s talk about pay-as-you-go and monthly reporting and the audit function.

To begin, pay-as-you-go is a method devised for paying the workers compensation premium. Insurance companies that offer true pay-as-you-go options will require the employer to work through a payroll management company or system. Don’t confuse the fact that a monthly premium payment, regardless whether it involves submitting rating payroll or not, has anything to do with the policy term. A pay-as-you-go policy is still set up on an annual basis and is still an insurance contract which includes policy terms and conditions which includes the audit provision. That’s what allows the insurance company to conduct an audit of the employers books. Visit our web page on pay-as-you-go workers compensation for more information on how these policies work. 

In one pay-as-you-go scenario, a reporting form, the employer will on some regular basis, usually monthly or quarterly, submit to the insurance company the rating payroll for the period in question with a calculation of the premium owed along with their check for that amount. The idea here is that as the employer submits the rating payroll on a regular schedule along with the premium that rating payroll generates there should be no need for an audit at the end of the policy period. In this scenario the employer will have put up some sort of security deposit equal to a minimum of several months premium. This is the insurance carriers guarantee that if the employer does not complete the monthly or quarterly reports and pay the premium that they will have enough premium collected in advance to cover their exposure until cancellation of the policy takes place. You’ll find this method is used by a variety of insurance companies typically on clients with fluctuating payroll. Think contractors. It makes sense. Why not pay the premium your payroll actually generates during the time period? Why wait until the end of the policy and the audit?

In another scenario, a true pay-as-you-go type of product, the employer arranges with an outside payroll company to handle the payroll for their employees. That service will also provide access to workers compensation coverage for those employees. This is accomplished by working with an insurance company who offers the pay-as-you-go product. You see the insurance company guarantee is that each pay period the payroll company will collect from the employer the actual premium due on the payroll submitted. The payroll company will forward that premium to the insurance company and everyone’s happy right?

Just because the premium is paid off some kind of payroll submission does not eliminate the need for an audit to be conducted! Nor does it eliminate the mistakes and errors that happen during the audit process! Don’t forget that the audit is not just about verifying rating payroll. The audit is about discovering additional premium generating issues along with verifying the rating exposure. A few different terms.

Consider this. There is more to rating exposure than rating payroll. Have you ever read through the list of remuneration items? If not then you should do so right now! Rating exposure is made up of a great deal more that just payroll.

Here’s a few things to ponder that are considered rating exposure:

  • Uninsured Subcontract Labor –
  • Davis Bacon or Other Prevailing Wage Laws –
  • Inclusion/Exclusion Issues of Executive Officers, Individuals, Partners, LLC Members
  • Commissions
  • Bonuses
  • Holiday and Vacation Pay

Make sure you contact your individual state rating bureau and check out the list of items that are considered remuneration for your state.

Other items that may affect pay-as-you-go policies at audit time include:

  • Improper Classification Codes Applied
  • Disallowed or Improper Use of Payroll Separation
  • Improper Application of Experience Rating Modifiers
  • Incorrect Application of Rating Credits
  • Etc…..

And the issues just keep on going!

As you can see, pay-as-you-go plans may have a place out there and may in fact be useful to those employers who have a normal fluctuation in their payroll from week to week and month to month. But they are not the cure-all, that some seem to preach, to all the common audit errors and mistakes that occur on a regular basis!

Hope this helps you out and thanks for reading!